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Dueling Fools: Pfizer Bull Rebuttal

The patent expirations are an issue, but the cash is what's really important.

Collectively, my Foolish colleague Brian Lawler and I have identified Pfizer's (NYSE:PFE) key investment merits and drawbacks. Fools must now weigh in on deciding to buy, hold, or sell the stock. Our conclusions hinge on how successful we think Pfizer will be in offsetting the deluge of patent expirations that have already sent several of its drugs to the generic graveyard -- and will send the almighty Lipitor down the same path within the next few years.

I think Brian is being overly pessimistic in his prognosis for Pfizer, as is the stock market overall. Brian estimates that Pfizer will lose up to 40% of its total sales over the next four years as patents expire. However, we already know that management expects flat revenues in 2007 and 2008, because it said so in a Jan. 22 press release. It also expects to grow earnings and cash flow thanks to aggressive cost-cutting moves and share buybacks. And yes, there's still the juicy 4.4% dividend yield to tide investors over until total sales growth returns, which Pfizer anticipates will be in 2009 or 2010.

Additionally, back in August, then-CEO Henry McKinnell stated that patent expirations will subside after 2007, after which the next hurdle is Lipitor's expiration around 2010. So, overall, I only see about 20% of sales at risk over the next four years. That's still no small amount, since we're talking about $10 billion or so in sales, but don't count Pfizer out yet.

For starters, Pfizer has a war chest of more than $12 billion in cash with which to pursue acquisitions and snatch existing drugs or pipeline candidates from the clutches of the competition. The bulk of this capital stems from the sale of Pfizer's consumer health-care business to rival Johnson & Johnson(NYSE:JNJ) for more than $16 billion in pre-tax funds. Also, Pfizer has been generating more than $10 billion annually in free cash flow since 2003 and can reasonably be expected to continue doing so over the next couple of years. Biotech has been a popular area for big-pharma acquisitions; maybe Pfizer will find opportunity by pursuing the likes of Biogen Idec(NASDAQ:BIIB), Allergan(NYSE:AGN), MedImmune(NASDAQ:MEDI), or even Idexx Labs(NASDAQ:IDXX) to build on its animal health business.

If that doesn't work, Pfizer has by its own admission a very promising pipeline of internal drug candidates. As of Dec. 20, it had about eight drugs in phase 3 trials, meaning they are close to being released on the market if the final phase goes well. Areas of focus range from obesity and malaria to lung and breast cancer, so these drugs could have blockbuster potential. The company also has close to 100 drugs in phase 1 or 2 trials. It won't be easy -- and investors will remain skeptical of any promise, since Pfizer has an uneven history in bringing its own drugs to market -- but there is room to be patient with the stock.

Which brings us back to Pfizer's prodigious levels of cash generation. I think it has enough capital and time to find enough new products to eventually more than offset the ones coming off patent. And while I wait for that, I'll collect a hefty dividend coupon and sit on a valuation I believe accounts for the risks Pfizer is facing. Time will tell whether Brian is right or I am, but hopefully we've offered enough food for thought to help you come to your own conclusion. Feel free to add your opinion to the Motley Fool's burgeoning CAPS community so you can gloat when your predictions end up on target.

Pfizer is an Inside Value recommendation. You can find out why with a 30-day free trial. Johnson & Johnson is an Income Investor selection, and Biogen Idec is a Stock Advisor pick.

Fool contributor Ryan Fuhrmann is long shares of Pfizer but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.